20 February 2008 External T.I. 2007-0228081E5 - Modifications to ss 164(3) for 227(10.1)(c)

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Calculation of interest on Part XIII tax refunded under paragraph 227(10.1)(c).

Position: Interest is payable beginning on the later of the date of the assessment and the day on which the overpayment arose.

Reasons: Interpreted in the context of subsection 164(3) of Part I and section 227 of Part XIII of the Act.

									2007-022808
XXXXXXXXXX 								Gwen Mah
									Tel:  1-613-957-2113
Attention:  XXXXXXXXXX 						Fax: 1-613-957-2088

Dear XXXXXXXXXX :

Re: Modifications to subsection 164(3) of the Income Tax Act ("Act")¹

We are writing in response to your request of March 15, 2007 and revised on October 1, 2007, for our views on the application of paragraph 227(10.1)(c) as it applies for the purpose of subsection 164(3). In particular, you have asked about the application of the phrase "with such modifications as the circumstances require" for the purpose of determining the amount of refund interest, if any, that is payable to a non-resident corporate taxpayer who is eligible to receive a refund of Part XIII tax assessed under paragraph 227(10.1)(c).

Paragraph 227(10.1)(c) provides that the Minister may at any time assess any amount payable under Part XII.5 or XIII by any non-resident person and, where the Minister sends a notice of assessment to the person, sections 150 to 163, subsections 164(1) and (1.4) to (7), sections 164.1 to 167 and Division J of Part I apply with such modifications as the circumstances require.

Those provisions (sections 150 to 163, subsections 164(1) and (1.4) to (7), sections 164.1 to 167) fall under Division I of Part I and provide the rules governing, amongst other things, the issuance of assessments, objections to assessments, refunds and refund interest.² The entitlement to refund interest is dealt with in subsection 164(3) which provides, in part: Where under this section an amount in respect of a taxation year... is refunded, ....the Minister shall pay or apply interest on it at the prescribed rate for the period beginning on the day that is the latest of the days referred to in the following paragraphs and ending on the day on which the amount is refunded...

(b) if the taxpayer is a corporation, the day that is 120 days after the end of the year;

(c) if the taxpayer is (i) a corporation, the day that is 30 days after the day on which its return of income for the year was filed under section 150, unless the return was filed on or before the corporation's filing-due date for the year, ...;

(d) in the case of a refund of an overpayment, the day on which the overpayment arose; and
...

Your Submission

You submit that the modifications to subsection 164(3) required by subsection 227(10.1) would have the effect of modifying paragraphs 164(3)(b) to (d) such that,

• Paragraph (b) would refer to 120 days after the calendar year end instead of 120 days after the fiscal year end;
• Paragraph (c) either would not apply or would refer to the information return filed by the payer (due by March 31 of the following calendar year) instead of the filing of a Part I return under section 150; and
• Paragraph (d) would refer to the date of the last remittance of all remittances for the relevant calendar year and if all remittances for the year were made in a timely manner, then the latest date is January 15th of the following year, instead of the date on which the overpayment arose.

As a result, assuming the overpayment was remitted within the time required by the Act, you submit the latest date would generally be 120 days after the relevant calendar year such that the corporate taxpayer would be entitled to refund interest computed from that date until the date the amount is refunded.

Our Comments

The situation outlined in your letter appears to relate to a situation involving a specific taxpayer. It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular 70-6R5, "Advance Income Tax Ruling", dated May 17, 2002. This Information Circular and other CRA publications can be accessed on the Internet at http://www.cra-arc.gc.ca. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office ("TSO") for their views. A list of the TSOs is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following general comments.

Refund interest under Part I

Under Part I of the Act, a taxpayer is generally required to remit amounts in respect of tax owing for a taxation year either through periodic source deductions or installment payments. Where the total of these payments exceeds the amount of the tax liability for the taxation year, which is fixed by the filing of a return and/or by an assessment, the taxpayer is entitled to a refund of the excess amount of Part I taxes.

Subsection 164(1) authorizes the Minister to issue a refund under Part I provided that certain conditions are satisfied. If the conditions are met and the taxpayer is entitled to a refund, the taxpayer may further be entitled to refund interest under subsection 164(3). Refund interest is calculated for the period that begins on the latest of five dates and ends on the date that the amount is refunded. Those five dates turn on essentially three main elements: whether the taxpayer is an individual or a corporation, whether the return was filed on time, and the taxpayer's balance-due date. For the purpose of your inquiry, we have limited our comments to situations involving corporate taxpayers.

Where a corporation has filed its Part I return on or before its filing-due date and is entitled to a refund under subsection 164(1), the relevant dates for determining the beginning date for which refund interest is payable under subsection 164(3) is the latest of two dates,

(1) The day that is 120 days after the corporation's year end; and

(2) The day on which the overpayment arose.

Where the corporation has late filed its Part I return, the relevant dates for determining the beginning date for which refund interest is payable under subsection 164(3) is the latest of two dates,

(1) The day the return is filed plus 30 days; and

(2) The day on which the overpayment arose.

Refund interest under Part XIII

For each payment made to a non-resident, sections 212 and 215 require the payer to withhold and remit taxes under Part XIII on behalf of that non-resident. The amount withheld is a final tax and the non-resident is not required to file a return. Where the amount withheld and remitted is excessive, subsection 227(6) provides that, on written application, the Minister shall refund any tax under Part XIII that the person was not liable to pay.

If the amount of the refund requested under subsection 227(6) is disputed, the Minister is required to issue an assessment under subsection 227(7) and the particular provisions from Part I governing assessments, refunds, refund interest, objection and appeal rights, apply with such modifications that the circumstances require. Similar provisions from Part I also apply, with modifications, in subsections 227(10) and (10.1) where the Minister has, at his discretion, issued an assessment for an amount payable under Part XIII. Therefore, the provision for refund interest is available in respect of amounts paid on account of Part XIII tax where an assessment has been issued and it is established that the amounts remitted exceed the amount payable.

When subsection 227(6) is compared to subsections 227(7), (10), and (10.1), it is evident that refund interest is not authorized by subsection 227(6) and that Parliament intended to limit the payment of refund interest on amounts remitted under Part XIII to those circumstances described in subsections 227(7), (10), and (10.1).

Applying subsection 164(3) with modifications that the circumstances require

The Department of Finance explanatory notes do not discuss the type of modifications that would be required to subsection 164(3) consequent to a paragraph 227(10.1)(c) assessment. While the Courts have made general comments about the phrase in reference to objection and appeal rights, they have not addressed the application of this provision in the context of subsection 164(3).

It is our view that subsection 164(3) is engaged upon the issuance of a notice of assessment under paragraph 227(10.1)(c) and that the modifications to subsection 164(3) that the circumstances require are as follows:

• Paragraph 164(3)(a) and subparagraph 164(3)(c)(ii) would be ignored as they apply only to individuals.
• Paragraph 164(3)(b) would be ignored as the 120-day time period is only relevant if the corporation files a Part I return on time for a particular taxation year. In our view, the information return that accompanies the remittance of Part XIII tax and is filed by the payer is not equivalent to a Part I return of income by a taxpayer. The information return is merely a statement indicating the amount of tax that has been withheld on behalf of the non-resident. It does not purport to determine the correct amount of tax nor does it put the Minister on notice of a potential overpayment. Therefore, the 120-day period in paragraph 164(3)(b) should have no application for the purpose of identifying the appropriate date on which refund interest becomes payable on a refund of Part XIII taxes.
• Subparagraph 164(3)(c)(i) would be modified to provide for refund interest to be payable after the notice of assessment has been issued. It is our view that, for the purposes of Part XIII, subsection 164(3) is engaged upon the issuance of a notice of assessment under paragraph 227(10.1)(c) and in that respect, the reference "return of income" in this subparagraph would be modified to read "notice of assessment" (which is the relevant document that determines the tax payable and that establishes that a refund is owing).³
• Paragraph 164(3)(d) would remain unchanged; the date of the overpayment would be the date that the amount was withheld and remitted.
• Paragraph 164(3)(e) would be ignored as it applies specifically to repayments of amounts in controversy.

Summary

The refund interest provisions in subsection 164(3) are activated by the issuance of an assessment under paragraph 227(10.1)(c) for an amount payable. The assessment date establishes the date on which the Minister has determined the taxpayer's Part XIII liability and whether a debt is owing to the taxpayer. After considering the circumstances in which refund interest is payable on Part I taxes and the circumstances in which refund interest is payable on Part XIII taxes, we would, in applying subsection 164(3) to an assessment issued under paragraph 227(10.1)(c), modify subsection 164(3) by ignoring paragraphs 164(3)(a), (b) and (e) and subparagraph 164(3)(c)(ii), substituting "notice of assessment" for "return of income" in subparagraph 164(3)(c)(i), and retaining paragraph 164(3)(d).

Therefore, the beginning day of the period on which refund interest is payable under subsection 164(3), modified for the purposes of paragraph 227(10.1)(c), is the latest of two dates,

1. The date of the assessment; and

2. The day on which the overpayment arose

and ending on the day the amount is refunded.

We trust the above is helpful. Please contact Gwen Mah at 613-957-2113 if you have any questions or comments.

Yours truly,

Daryl Boychuk
for Director
International and Trusts Division
Income Tax Rulings Directorate,
Legislative Policy and Regulatory Affairs Branch
5 b - Closing letter TP

ENDNOTES

¹ All statutory references herein are to the Act.

² Division J of Part I relates to Appeals to the Tax Court of Canada and the Federal Court of Appeal.

³ The reference to the 30-day time period after a return is filed (to provide the Minister time to process the return) is ignored since in this case, an assessment has been issued. Also, the filing-due date is ignored since an assessment issued under paragraph 227(10.1)(c) does not require the filing of a return.